What Every Buyer Should Know When Reading Disclosure Packets
So, you’ve begun the process of searching for a house, and you are probably wondering: what do I do now? Before anything else, let me extend a congratulations! Buying a house can be a very exciting yet stressful process and getting started is often incredibly difficult. At Atlasa, we understand that there are several steps that go into buying the right house for you that might be confusing, complicated, or tiresome to work through, and thus, we are here to help.
Perhaps you’ve experienced this scenario before: you express interest in a home after going to an open house and are sent a 300+ page disclosure package. This package seems to come with endless documents with endless information, and soon enough you are drowning in technical speak and forms that only get harder to read with every page. Each document seems important, providing information about the house that you probably want to know. However, it is in the midst of the 27th page that you might ask yourself: what do you really need to read and understand about a house before spending the next eight hours reading through every document word for word?
Well, this abridged explanation of disclosures in the State of California should help you figure that out, or, help you find us so that we can help you out. Let’s start from the beginning:
What are Disclosures?
Disclosures are a set of documents put together by the listing team and sellers to disclose all of the known information about the property. Disclosure packages include inspection reports, advisories, floor plans, compliance documents, and anything else that the seller or agent has provided.
Reading through these documents is a crucial part of buying a house so that you can understand the property’s condition, which may not be known or seen during open houses or showings. Sellers can disclose quirks that the property may have, previous fixes, and renovations that were done during their period of ownership.
Notable Documents within a Disclosure Package
Transfer Disclosure Statement (TDS)
The transfer disclosure is typically found at the beginning of the disclosure package and is required by law in most residential sales in California. It provides information about what is at the property as well as whether renovations have been made, if there is an encroachment, or if the subject property is a part of a Home Owners Association (HOA). It is important to read this document carefully since the Seller will be noting features about the property or undergoing negotiations that may not be disclosed elsewhere.
Preliminary Title Report
The California Land Title Association defines a Preliminary Reports as:
A preliminary report is a report prepared prior to issuing a policy of title insurance that shows the ownership of a specific parcel of land, together with the liens and encumbrances thereon which will not be covered under a subsequent title insurance policy.
It should be important to note that it is only an offer of title insurance and may not contain every item affecting title. Within the document there will be hyperlinks to further documents that can provide more information about the property. This document also shows property taxes, percentage of ownership (specific to condos and TIC’s), and easements.
You want to ensure that there is no “cloud on title,” which would mean there is an irregularity in the chain of title of the property. If there is a cloud on title, it needs to be fixed before closing. Types of clouds on title, to name a few, range from misspellings and unpaid property taxes to liens. A lien occurs when there is an unpaid debt related to the property, there are various types of liens such as mechanics, bank, and mortgage. More about types of liens can be found here.
General Home Inspection
The home inspection is arguably one of the most important documents within a disclosure package. This inspection notes the foundation type, potential fixes that may need to be done around the property, and the overall condition. Some home inspections are only a few pages while others easily reach or surpass 100 pages. The size of a home inspection is dependent on the inspector, building size, or amount of items flagged by the inspector.
It is important to note that not everything noted in the home inspection needs to be fixed immediately. Many inspectors’ notes are informational and, thus, seem complex; however, most of the time, some fixes can be done by a licensed contractor or handyman. You may see items such as:
- The toilet is loose at the floor
- The door rubs on the floor
- The outlets are not GFCI
Each of these items are smaller items that could be fixed by a handyman.
When there is an issue noted about the foundation, that is something that calls for caution. Fixes to a foundation can easily cost between $30K to $100K, however, a professional structural engineer can provide a more accurate assessment. You can read more about our thoughts about questionable foundations here.
Pest or Termite Inspection
The pest inspection is almost as important as the home inspection however this notes fungus, subterranean termites, drywood termite damage, and other findings. The inspector is unable to inspect inaccessible sections of the home such as areas closed off by walls, ceilings, substructure, adjacent structures, etc. A diligent inspection may not uncover the true condition of infestations behind such concealed areas and there may be sections within a report that notes “further inspection.”
Unlike the home inspection, most pest inspections actually include approximated costs, as these inspection companies can also do the work. These costs can be used to determine the severity of the damage inspected.
Natural Hazard Disclosure
A Natural Hazard Disclosure (NHD) report is a legal disclosure form that is required in California for almost all home sales. NHD reports indicate if a home is located in an area that is prone to flooding, fires, earthquakes, or seismic activity. This disclosure notes items such as liquefaction, landslide risk, earthquake risk, flood zones, and also includes the tax report.
The tax report goes through government lists and provides property tax information for the property. There are five separate things it goes over:
- Mello-Roos Community Facilities Districts
- 1915 Bond Act District
- Property Assessed Clean Energy (PACE) Contract
- Direct Assessments
- State Responsibility Area Fire Prevention Fee
First, it’ll summarize if the property is subject to any of these taxes. If it marks “yes” the subsequent pages will note what the tax is and the amount. There are further pages that will also help you calculate your property taxes after the sale.
Square Footage Disclosure
This document is filled out by the listing team and sellers to note the square footage and source which that number was derived from. Public records are historically the most accurate. However, there are times when the public record number is different from the actual size of the property. An example of this is if there was space legally added to the property. To determine if the space has been legally added it is always good to check permit records for the property in question.
It is important to note that square footage should only be included if it is considered “living space.” For example, a garage or deck cannot be considered living space, and therefore should not be included in the overall square footage of a property.
Agent Visual Inspection Disclosure (AVID)
An agent visual disclosure is a disclosure that notes the visual imperfections that a property may have as seen by the agent. It is required for both the listing agent and the buying agent (once in contract) to fill out this form. For example, some of the items which may be brought up by the agent are some scratches or marks on the floor or baseboard. It will not be as in-depth in comparison to the actual inspector’s reports but serves as another great form of information.
It should be good to note that this disclosure does not take the place of other inspections or the disclosures with the seller’s complete.
What Does a Disclosure Package NOT Contain?
When doing diligence on a home, it is very important to note that the disclosure package does not contain every possible issue in a home.
1. What the Sellers Chose Not To Mention
California requires every seller to disclose every material fact they know about their property. That being said, many sellers unfortunately can hide bad things about that home that might hurt their sale price, such as:
- Verbals inspections done with contractors that uncover hidden issues
- Soil contamination
- An altercation with neighbors that only the sellers know about
- A nearby construction project that is very loud
- A future construction project that might block the views of the home
This begs the question:
If California requires sellers to disclose everything, how can the sellers get away with hiding information?
After a sale, it will be the buyer’s burden to (a) take legal action and (b) prove that the sellers knew about a problem that affected the value of the property. There often are sellers that still get away with hiding problems and getting away with it, because the buyers were too busy to take action after the sale.
2. Problems That the Sellers Didn’t Know About
Many sellers, especially in coastal cities like San Francisco Bay Area, Miami, New York, San Diego, and Los Angeles, most homeowners are busy professionals who never notice issues about their home that could spiral into much larger problems.
Examples of such issues are
- A pool filter that might be corroding that breaks 1 year after close of escrow
- A mostly clogged sewer line that will eventually get fully clogged and might require a replacement. Not every county requires a sewer lateral inspection report, so it is often missing from disclosure packages
- A previous contractor’s work that was unpermitted or subpar
- Previous soil contaminations that might require an Environmental Phase 2 report (this is not found in common disclosure packages)
How Do I Protect Myself From Problems Not Found in Disclosure Packages?
It is impossible to identify every single problem with a house. That being said, there are a few actions you can take to unearth as many problems as possible:
- Hire the Right Realtor: Hire data-driven investigative Realtor that tries to uncover as many issues as possible about the home as possible. We at Atlasa would love to be of help. Feel free to reach out to us at firstname.lastname@example.org
- Budget Uncertainty Into Your Price: If certain items are not possible to quantify, you could bake a “capital expenditure budget” into your price to budget for future issues that could occur. For example, if there is a competitive home where you aren’t 100% confident about the state of the sewer-lateral of the home, you could bake in a $10K sewer lateral fix into your price.
- Hire an Additional Inspector: If the state of a certain part of the home is vague in the disclosure package, it is often possible to bring in a private inspector to discover the real condition of the home. Work with your Realtor to get the best inspection specialists.
Overall, buying a house is a complicated and confusing process that can make a buyer feel overwhelmed and anxious. With a load of paperwork to review and process, not everyone feels up to the task. What is most important in the buying process — and what Atlasa aims to do with all its clients — is that one is informed and confident in their decision. All these forms, disclosures, and documents are meant to give a buyer everything they need to know and then some.
At Atlasa, we understand the difficulty of going through this process by yourself, and thus, we aim to help clients through it all. To learn more about Atlasa or to get in contact with an Atlasa agent, visit www.atlasa.com or email email@example.com.